German "wisemen" say euro zone states should be able to go bankrupt

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BERLIN, July 28 (Reuters) - The German government’s panel of independent economic advisers favours the creation of a sovereign insolvency mechanism for euro zone states to prevent future crises and says countries should be able to leave the currency bloc as a last resort.

In a special report published on Tuesday, the council of five experts known as the “wisemen”, said the Greek debt crisis had underscored the urgent need for further reforms to make the euro zone more stable.

Alongside measures such as deepening the European banking union, the council said the euro area’s crisis toolkit should be complemented by a mechanism for orderly sovereign insolvencies, which would make the currency area’s no bail-out clause credible.

“To ensure the cohesion of monetary union, we have to recognise that voters in creditor countries are not prepared to finance debtor countries permanently,” said Christoph M. Schmidt, Chairman of the German Council of Economic Experts.

The Greek crisis has called into question the future of the currency bloc with popular misgivings in Germany over a third bailout for the heavily indebted country running deep.

Such an insolvency mechanism would force creditors to bear losses if states went bankrupt, in turn prompting investors to assess sovereign risk in more detail, the council said.

The council recommended that an exit of a country from the euro area should remain possible, albeit as an “utterly last resort.”

“A permanently uncooperative member state should not be able to threaten the existence of the euro,” the council wrote.

They also warned against “quick-win” policies, such as the creation of a euro zone treasury, a European unemployment insurance scheme or an economic government for the bloc.

“Making the euro area collectively responsible for potential costs without member states giving up any national sovereignty over fiscal and economic policies would - sooner or later - make the currency union more unstable,” they wrote.

Their warning came after a report in German magazine Der Spiegel that Germany was willing to discuss the creation of a euro zone finance minister who would have his own budget and the power to raise extra taxes. (Reporting by Caroline Copley; Editing by Madeline Chambers)